Friday, December 12, 2014

Genealogy and Critique of Applied Welfare Economics

When he was little, Ian Malcolm David Little lived in a big house. It had 20 servants and 23 bedrooms. Little's mother, Iris's grandfather, Thomas Brassey, "was perhaps the greatest 'captain of industry' the world has ever seen." According to Little's obituary in the Independent, his great grandfather was made an earl in 1911, which would have been remarkable since Thomas Brassey Sr. had died forty years earlier.

It was actually I.M.D. Little's great uncle, Thomas Brassey Jr., who was made an earl in 1911. In 1872, Brassey Jr. wrote Work and Wages, an empirical study of wages, hours and output using the extensive labour accounting records accumulated by his father. Brassey's book had quite an impact on economic thinking. The prominent American economist, Francis Amasa Walker, extolled the authoritative status of Brassey's evidence:

[B]y far the most important body of evidence on the varying efficiency of labor is contained in the treatise of Mr. Thomas Brassey, M.P., entitled Work and Wages, published in 1872. Mr. Brassey's father was perhaps the greatest "captain of industry" the world has ever seen… The chief value of Mr. Brassey, Jr.'s work is derived from his possession of the full and authentic labor-accounts of his father's transactions....

Subsequently, in what is "regarded to be the first modern economic textbook," Alfred Marshall credited Walker for "forcing constantly more and more attention to the fact that highly paid labour is generally efficient and therefore not dear labour…" Marshall judged that fact to be "more full of hope for the future of the human race than any other… [although it] will be found to exercise a very complicating influence on the theory of Distribution."

That is to say it was Brassey's evidence that lent weight to Walker's theoretical arguments that "complicated" the theory of distribution. In the early twentieth century, Marshall's star pupil, Sydney Chapman, collaborated with Brassey Jr. on a three-volume continuation of his Work and Wages, which included an analysis of the hours of labour that incorporated the more theoretically-advanced analysis of that topic first elaborated in Chapman's 1909 Economic Journal article, "Hours of Labour." In his 1872 review of Brassey's book, Frederic Harrison had written:

To this first proposition — that the rate of wages affords no indication of the cost of production — Mr. Brassey adds a second, which is quite as significant. "It is equally true," he says, " that the hours of work are no criterion of the amount of work performed." Now this is very instructive, especially at the present time. Throughout the movement to substitute the day of nine hours for that of ten, the public instructors invariably assume that this is equivalent to a loss in productive power of 10 per cent. Nothing can be more utterly belied by facts.

Chapman's analysis of the hours of labour was reiterated 11 years later in A. C. Pigou's Economics of Welfare, which, according to Little in his Critique of Welfare Economics, "appears to have popularized the use of the word 'welfare' by calling his book The Economics of Welfare." In his footnote (p. 78) discussing the evolution of terminology, Little nominated 'satisfaction' and 'happiness' as precursors to welfare. But why not 'distribution'?

Pigou's discussion of the hours of labour firmly adhered to the empirically-grounded theoretical "complication" of the theory of distribution that was launched with Brassey's Work and Wages and was elaborated by Walker, Marshall, Chapman and finally Pigou. J. R. Hicks and Lionel Robbins shared Pigou's confidence in Chapman's analysis of the hours of labour. In his 1929 article "The economic effects of variations of hours of labour" Robbins wrote:

The days are gone when it was necessary to combat the naïve assumption that the connection between hours and output is one of direct variation, that it is necessarily true that a lengthening of the working day increases output and a curtailment diminishes it.

Of course those days weren't gone. Or if they were gone, they soon returned. The complication was undone by "a simple book-keeping artifice," which is to say by a sleight of hand.